When the price of oil rises just one dollar, the Pentagon's fuel expenses climb an astounding $130 million.

So the $50 rise in oil prices over the past six months has taken over a half billion dollar toll on the U.S. government. And that's on your dime.

Obviously the massive machinery needed to transport troops and equipment by air, land and sea is the reason for the military's high fuel use. But just how much does the Defense Department—the government's largest consumer of petroleum products—spend on fuel?

According to Lt. Col. Brian Maka, "we anticipate over the next three months that the increase in fuel costs for the department [will be] $1.2 billion." With a fuel bill like that, you can bet the Pentagon is going to use its huge R&D resources to look for alternative fuels, including algae biofuels.

In fact, back in February, the National Renewable Energy Laboratory (NREL) and the Air Force Office of Scientific Research (AFOSR) held a joint summit with outside experts to to discuss a variety of issues related to algae biofuel production for jet fuel.

I know more than a few of you are interested in investing in algae biofuel, so let's take some time to explore the basic economies, capacities and companies associated with algae biofuel production.

Problems with Current Fuels and Biofuels

In order to determine the benefits of algal oil, we first have to identify some of the problems that it could solve. Many of these issues are well-known, but they're certainly worthy of repitition.

The most obvious is a shortage of petroleum reserves and supplies increasingly being attributed to peak oil. And then there's the rapidly rising price of petroleum, which has gone up 90% in the past year—and is constantly breaking new highs.

What's more, the U.S. has a serious energy security problem. We consume 20.7 million barrels per day (bpd), while importing 12.4 million bpd—leaving us 60% dependent on petroleum imports.

And while crop-based biofuels initially offered a glimpse of relief, their contribution to rising fuel prices (even though drought, lower yields and higher demand are the main causes) has led first generation biofuels to essentially be labeled the fourth member of the Axis of Evil.

But what most don't realize is that rising food prices also hurt crop-based biofuels producers, who obviously have to pay higher prices for their feedstocks like corn and soy oil. Soy oil prices, one of biodiesel refiners' favorite feedstocks, have risen more than 35% in the past six months.

So more and more, the industry is realizing that crop-based biodiesel is not the most promising avenue, what with unstable prices and their limited capacity. NREL, for example, deemed that the entire U.S. soybean crop could only provide about 2.5 billion gallons per year (bgy) of biodiesel. And worldwide production of biodiesel from all oilseed crops can only yield 13 bgy.

That's less than a drop in the bucket when you consider U.S. diesel demand alone is 60 bgy. So at the end of the day it's a food vs. fuel issue, not on a cost basis—food prices are going to rise anyway—but on an availability basis.

Benefits of Algae Biofuels

Significant production of algae biofuels could solve a great deal of those problems.

That's because algae, or microalgae, has a much higher productivity potential than crop-based biofuels.

Here's a chart showing various feedstocks and their potential oil yield per acre. (note: g/m2/day is the harvest rate of the algae and % TAG is the percentage of triglycerides

These high yields can be attributed to algae's high growth rate, which is often monitored in hours instead of days, and has inputs of only land, sunlight, water, carbon dioxide (potential for carbon credits) and nutrients.

And while deriving fuel oil from algae has been cost prohibitive in the past, oil on its way to $150 per barrel or higher certainly makes it an attractive alternative.

Plus, the algae growth cycle can actually be used as a carbon sequestration mechanism because carbon dioxide is the primary input required by algae to grow. In fact, if the U.S. were to derive all its diesel from algae (60 bgy), the growth of that algae could displace 56% of U.S. power plant emissions.

Growing algae is also very water efficient. Producing enough to make 60 bgy of biodiesel could require as little as 16 trillion gallons of water. To put that in perspective, we use 4,000 trillion gallons of water per year to grow corn in the U.S.

The best part is, algae can grow in brackish, saline and wastewater, further reducing the amount of freshwater needed to grow it. And the nutrients in wastewater actually feed the algae, making it possible to cultivate at any one of the 5,100 wastewater treatment facilities nationwide.

And the benefits go on.

• No one country (or host of hostile countries) has a monopoly on algae production or the algae production equipment.

• Algae can grow in temperatures ranging from below freezing to 158 degrees Fahrenheit

• It is not in direct competition with food crops

• There are a multitude of algae biofuel value-added byproducts like syngas, high-protein animal feeds, agricultural fertilizers, biopolymers (plastic), glycerin and even ethanol and jet fuel.

Investing in Algae Biofuel Companies

There have been limited investment opportunities so far in the algae biofuel arena despite all its promise and potential. So far, it's been sort of a throw it at the wall and see what sticks kind of strategy.

This is so because of the fair amount of companies pursuing the technology, each keeping their methods and processes under lock and key.

Here's a list of some companies dabbling in algae growth, harvesting and algae biofuel production:

• GreenShift Corporation (GERS.OB)

• Nanoforce Inc. (NNFC.PK)

• Valcent Products Inc. (OTCBB: VCTPF)

• Green Star Products (Pink Sheets: GSPI)

• OriginOil, Inc. (OTCBB: OOIL)

• PetroSun Inc. (Pink Sheets: PSUD)

But don't let the presence of all these tiny companies fool you. This is a legitimate technology also being pursued by the big boys, like Royal Dutch Shell (LSE: RDSA).

If I had to place a bet right now, I'd lean toward OriginOil or Valcent, but that's based purely on proven work and technology development to date.

This is still a nascent industry that's receiving gobs of money in the venture capital realm. When the dust settles, it could be a tiny start-up company (like the one springing up from major research institutions around the country) that find a winning solution.

One thing is for sure, this is exactly the kind of opportunity we love at the Alternative Energy Speculator: new technology with an enormous upside.

As this scenario unfolds, you can be sure those readers will get first crack at any companies capable of bringing algae based fuel to market in a scalable fashion.

So sign up today to make sure you don't miss it, and you'll be taking other alternative energy related profits in the process.

Call it like you see it,

Nick